Module 1 Flashcards
Prior to providing retirement planning services, the scope of the services offered should be mutually defined by the planner and client. This initial discussion should not include which one of the following topics?
- disclosing the planner’s compensation arrangements.
- identifying specific funds in which to invest.
- establishing the duration of the services and engagement.
- identifying the services to be provided.
(LO 1-2)
- identifying specific funds in which to invest.
Specific investments are not discussed until step four of the planning process, when the planner develops and presents the retirement plan. The initial meeting should include a discussion of the planner’s compensation arrangements so that the client can determine precisely how the planner will be paid. Duration of the engagement and scope of services provided should also be discussed.
The process of data gathering is the second step in the retirement planning process. All of the following are examples of data to be gathered except
- the client’s ability to purchase health insurance.
- the balances in retirement accounts.
- income sources and amounts.
- investment risk tolerance.
(LO 1-2)
- the client’s ability to purchase health insurance.
The client’s ability to purchase insurance or investments is reviewed in step three of the planning process, in which an analysis and evaluation of financial status takes place. During the data gathering process the planner should identify the client’s retirement account balances and income sources and amounts, and determine his or her risk tolerance.
Frank and Brenda Elliot own $20,000 in cash equivalents, $100,000 in invested assets, and $290,000 in use assets. The Elliots have an outstanding mortgage of $150,000 and owe $3,500 in credit card debt. What is the Elliots’ net worth?
- $236,500
- $256,500
- $260,000
- $410,000
(LO 1-3)
- $256,500
Net worth is defined as assets minus liabilities. The Elliots have $410,000 in assets and $153,500 in liabilities. Their net worth is $256,500.
Andy and Lori Cookston had a combined gross salary of $85,000 this year. Other cash inflows amounted to $9,800. Their fixed cash outflows were $26,300, and their variable cash outflows were $64,700. What was the Cookstons’ net cash flow for the year?
- $6,000 deficit
Net cash flow is calculated by subtracting total cash outflows from total cash inflows. Total cash inflows of $94,800 minus total cash outflows of $91,000 equals net cash flow of $3,800.
- $3,800
Net cash flow is calculated by subtracting total cash outflows from total cash inflows. Total cash inflows of $94,800 minus total cash outflows of $91,000 equals net cash flow of $3,800.
- $30,100
Net cash flow is calculated by subtracting total cash outflows from total cash inflows. Total cash inflows of $94,800 minus total cash outflows of $91,000 equals net cash flow of $3,800.
- $68,500
Net cash flow is calculated by subtracting total cash outflows from total cash inflows. Total cash inflows of $94,800 minus total cash outflows of $91,000 equals net cash flow of $3,800.
(LO 1-3)
- $3,800
Net cash flow is calculated by subtracting total cash outflows from total cash inflows. Total cash inflows of $94,800 minus total cash outflows of $91,000 equals net cash flow of $3,800.
All of the following are considered foundation financial goals except
- helping grandchildren with college.
- food, clothing, and shelter.
- emergency funds.
- life, health, and automobile insurance.
(LO 1-4)
- helping grandchildren with college.
College funding is considered a lifestyle goal. Foundation goals are those that contribute to more basic living needs such as food, insurance, and emergency funds. The coverage of risk exposures is also considered a foundation financial goal.
Which one of the following is an incorrect statement regarding retirement spending habits?
- expenditures for retirement plan contributions cease
- health costs increase
- automobile-related costs increase
- travel and recreation costs increase.
(LO 1-4)
- automobile-related costs increase
Automobile costs often decrease. Second cars for married couples are less necessary, and commuting miles are reduced or eliminated for the primary vehicle. Eliminating the second car reduces insurance expenses, license fees, maintenance costs, and taxes.
You have completed all of the activities involved in the data gathering step of the financial planning process, including obtaining sufficient quantitative information and documents. What is the next step of the process?
- gathering information to fulfill the engagement
- monitoring the recommendations
- analyzing and evaluating the client’s information
- implementing the recommendations
(LO 1-2)
- analyzing and evaluating the client’s information
Once you have gathered all of the appropriate data needed, the next step is to analyze it.
It is anticipated that the percentage of people who continue to work after they reach age 65 or 66 will increase in the future. All of the following are reasons for this increase except
- almost all categories of living expenses increase during retirement years.
- Social Security benefits are increased for people who delay receipt of benefits beyond their Social Security full retirement age.
- wages and salaries earned during retirement can increase retirement income.
- people’s life spans are expected to increase, so the need for retirement income must increase.
(LO 1-4)
- almost all categories of living expenses increase during retirement years.
With some exceptions, most categories of living expenses (such as transportation, clothing, and housing) decrease during retirement years. Some expenses, such as travel and medical, may increase during retirement years. It is true that Social Security benefits may increase for people who work past their Social Security full retirement age. Additionally, wages and salaries earned during retirement will obviously increase retirement income and longer life spans will result in a need for more retirement income.
When a client’s funds are insufficient to attain retirement goals, it is appropriate for the planner to suggest all of the following except
- retiring later than initially planned.
- increasing gifts to children.
- performing part-time work during retirement.
- spending less and saving more during retirement.
(LO 1-5)
- increasing gifts to children.
Increasing gifts to children would exacerbate the problem. If client retirement funds are insufficient to meet goals, gifts to children should decrease. All other options will increase available resources. Delaying retirement will also decrease the need for retirement income.
To calculate retirement needs, planners must make assumptions regarding future trends. These assumptions include all of the following except
- rates of investment return.
- inflation rates.
- political events.
- tax rates.
(LO 1-4)
- political events.
Although political events have effects on investment returns and inflation, it is nearly impossible to consistently predict events of such a random nature. Investment returns, inflation rates, and tax rates must be assumed when projecting retirement income needs.
During retirement, John wants to receive $50,000 at the end of each year for the rest of his life. To calculate the amount that he will need to save, you need to solve for
- annuity due—set calculator at begin.
- annuity due—set calculator at end.
- ordinary annuity—set calculator at begin.
- ordinary annuity—set calculator at end.
(LO 1-4)
- ordinary annuity—set calculator at end.
You do need to set the calculator in END mode and solve for ordinary annuity. If this were asking you to solve for an annuity due (where payments occur at the beginning of the period), you would set calculator for BEG.
Mary wants to retire the first of next year. She wants to receive monthly retirement income payments on the first day of each month. To solve the amount of capital required to provide her the income she wants, you need to solve for
- annuity due—set calculator at begin.
- annuity due—set calculator at end.
- ordinary annuity—set calculator at begin.
- ordinary annuity —set calculator at end.
(LO 1-4)
- annuity due—set calculator at begin.
To solve this problem, you would need to solve for annuity due, and set the calculator at begin.
John wants to have $1 million in his retirement fund when he retires in 25 years. Assuming that he earns 11% and inflation is at 3%, how much does John need to save on a level basis at the end of each year?
- $7,874
- $8,740
- $13,131
- $14,151
(LO 1-4)
- $8,740
Set calculator to END mode, one payment per year, and C/ALL
Keystrokes:
1000000, FV
25, N
11 I/YR
PMT Solution: $8,740
Notice that the inflation rate does not come into play here because the question notes that John will be saving on a level basis. Also, the goal is not expressed in today’s dollars. The goal is simply to have $1 million in the account at retirement.
Mary wants to have a retirement income of $60,000 protected against 3% inflation. She assumes that she will earn 9%, and wants to have the income for 30 years. How much capital will be required to provide Mary this much income at the first of each year? (Set your calculator for four decimal places.)
- $616,419
- $671,897
- $841,589
- $890,589
(LO 1-4)
- $890,589
Set calculator to BEG mode, one payment per year, and C/ALL
Because the problem indicates that Mary wants her income to be protected against inflation, you will use the inflation-adjusted rate of 5.8252% [((1.09 ÷ 1.03) – 1) × 100 = 5.8252].
Keystrokes:
60000, PMT
5.8252, I/YR
30, N
PV Solution: -$890,589
Margaret needs an annual retirement income of $48,000 protected against 2% inflation. You are to assume that she will earn 8%, and wants to have the income for 25 years. How much capital will be required to provide Margaret this much income at the first of each year?
- $512,389
- $553,380
- $620,521
- $657,022
(LO 1-4)
- $657,022
This problem uses the same steps as the previous problem (Problem #14). You solve for an annuity due using the inflation-adjusted rate of 5.8824%.
